Health care costs are dramatically higher in the U.S. than in the rest of the world. Yet our health care outcomes – from life expectancy to infant mortality – are average at best. There is little dispute over these facts.

The real debate comes when we ask why. While there isn’t one single answer, the rapidly rising cost of drugs and medical devices is a significant factor.

And the magnitude of this problem is likely to spike in the future if not properly addressed.

Pharmaceutical and medical device manufacturers have been criticized for their role in health care for over a decade. Little has changed. Americans pay significantly more for prescription drugs and medical devices than patients in the rest of the world.

The justifications for these extraordinarily high prices vary, but the industry is well aware that most patients have no choice but to pay whatever they charge.

The rising cost of American health care has close ties to the rapidly rising cost of prescription drugs and medical devices. (Photo credit: Wikipedia)

Pricing Not Always Justified, Even For Better Products

Pharmaceutical pricing has long been a point of contention among manufacturers, patients and payers of health care (including insurers, employers and unions).

The U.S. drug patent system allows a drug discoverer to exclusively sell the new drug for an extended time period. Theoretically, this protection is designed to encourage new medical discoveries and enable a drug or device company to recoup its R&D investment.

Because the theory makes sense, drug manufacturers use it to defend their prices. Certainly, those higher prices could be justified for developing clinically superior products but, all too often, the added cost far exceeds the incremental benefit.

How does drug pricing work? It’s hard to say. Pharmaceutical pricing is opaque. Drug manufacturers aren’t asked to quantify their costs or compare them to projected sales and profits. Business school students learn that the price of a product isn’t determined by what’s reasonable but what the market will bear. A wide array of drug pricing examples would indicate that pharmaceutical and medical device companies hire a lot of business school graduates.

As a more effective treatment of Hepatitis C than those available today, this drug will be a positive addition to the physician’s armamentarium. Its effectiveness at ridding the body of this virus justifies a higher price than the treatments available today.

But at $1000 a pill, its pricing is exorbitant, monopolistic, and disrespectful to the purchasers and patients who will bear the brunt of the massive cost.

It is estimated that total treatment costs will range from $84,000 to $200,000 per patient, depending on treatment length. That’s 10 to 20 times the cost of today’s approach. Is this a reasonable return for the company?

Drugs this expensive are typically produced for those with rare conditions. These “orphan drugs” should cost more per patient because of the limited treatment population. But Hepatitis C is a very common disease. It affects nearly 4 million Americans, according to the American Liver Foundation. So, this can’t be the reason.

High development costs are another oft-cited explanation for extremely high drug pricing. Typically, manufacturers don’t disclose exact R&D costs but Gilead is reported to have paid $11 billion for Pharmasset, the drug company that developed the medication that led to Sovaldi. From this purchase price, we can estimate the R&D costs of this drug.

At Sovaldi’s price-point, Gilead is estimated to recoup its total investment in less than 18 months with revenue estimates of $269 billion over the drug’s lifespan.

That would be a 2,500 percent return on investment.

Manufacturers of luxury cars or yachts can rightfully charge wherever they choose, but when patients in need have no alternative option, that’s just wrong. Interestingly, two other drugs with similar therapeutic responses will be available in the near future. It will be fascinating to see how they’re priced.

Compounding the high price of many medications is the reality that patients in others countries don’t pay nearly as much as those in the United States. The reason is that most governments across the globe regulate drug prices. To date, the U.S. Congress has prohibited the practice here.

The result is that drug sales in the U.S. subsidize a disproportionate share of a drug company’s research costs and contribute to much of the company’s margin, regardless of where in the world it is headquartered. If we want our businesses to be globally competitive, this needs to change. Aggressive Advertising Gives Manufacturers An Edge

Clinically superior products may very well warrant incrementally higher prices. But what of the increasing prices for products that don’t add much value?

Let’s compare the laparoscope to the prostate robot. First, the laparoscope.

In the past, removing a patient’s gallbladder required a large abdominal incision. Then along came a new technologically enhanced laparoscopic removal with remarkably better results. Suddenly, rather than making an incision under the entire right rib cage and cutting through the abdominal muscles, surgeons could remove the gallbladder with two tiny punctures and a telescope-like device.

Before, the surgeon would have to leave large rubber drains in place for several days to reduce the risk of infection. Average recovery times took up to six weeks. In contrast, gallbladder removal today is a routine, minimally invasive outpatient procedure that most people recuperate from in a week.

Mention “robot” to most patients and they’ll assume it’s a space-age advancement with major clinical benefits. It sounds sexy and, intuitively, its approach to prostate surgery makes sense. After all, the robot has steady hands and requires a smaller incision.

The problem is the outcome data doesn’t support the hype or the cost. The results – in terms of both cancer eradication and surgical complications – are similar to traditional alternatives, according to most studies. And for most surgeons, the robot-assisted procedure takes longer.

The price tag for this device is over $1 million, but that’s just the beginning. The company behind the robot designed it with disposable “arms” and built in an obsolescence factor that forces the hospital to replace each arm after 10 uses. The motivation isn’t safety. It’s profit. The manufacturer could have built a robot that could complete 100 procedures. But that would reduce profits dramatically.

By simultaneously marketing to consumers and hospitals, these devices were strategically positioned to help hospitals lure patients from their competitors. And, of course, it worked. Big billboards helped early adopting hospitals attract patients with the promise of a new “high-tech wonder.” Once a few hospitals jumped on board, others had no choice but to follow.

Introduction

Technology news is full of incremental developments, but few of them are true milestones. Here we’re citing 10 that are. These advances from the past year all solve thorny problems or create powerful new ways of using technology. They are breakthroughs that will matter for years to come.

Last week, the House Appropriations Committee approved a fiscal year 2015 budget plan that would withhold 75% of the funding the Department of Veterans Affairs requested for electronic health record system upgrades until the department can prove that it has made progress on EHR interoperability with the Department of Defense, the Military Times reports (Shane, Military Times, 4/16).

Similar language is expected to be included in the committee’s budget bill for DOD, according to EHR Intelligence (Bresnick, EHR Intelligence, 4/17).

Background

In February 2013, DOD and VA officials announced plans to halt a joint integrated EHR, or iEHR system, and instead focus on making their current EHR systems more interoperable.

The iEHR project was aimed at allowing every service member to maintain a single EHR throughout his or her career and lifetime.

The House and Senate in December 2013 approved a funding bill — the National Defense Authorization Act — that required VA and DOD to develop a plan for an interoperable or single electronic health record system by Jan. 31 (iHealthBeat, 4/7).

In January, DOD announced that it would keep its current EHR system through the end of 2018.

Last month, the Government Accountability Office released a report that said DOD and VA “have not substantiated their claims” that implementing separate, interoperable EHR systems will be more affordable and quicker than their original plan to develop a joint EHR system for both agencies (iHealthBeat, 3/17).

Details of Budget Cuts

The House budget proposal for VA includes about $65 billion in discretionary funding in FY 2015, a $1.5 billion increase from 2014’s funding levels. However, the funding is roughly $400 million less than what Obama administration officials had requested (Military Times, 4/16).

VA had requested $251 million for upgrading its current EHR system, called VistA Evolution, and $32.8 million to work on its Virtual Lifetime Electronic Health Record.

The 2014 Omnibus Appropriations Act prohibits VA and DOD from collecting more than 25% of their funding if they fail to meet EHR interoperability goals.

Lawmakers’ Comments

Rep. John Culberson (R-Texas) said if the departments “want their money, they’re going to have to earn it” (EHR Intelligence, 4/17).

Rep. Sanford Bishop (D-Ga.) added that he hopes the funding cuts will “finally [get] the two departments’ attention, and I expect to see some real progress on this soon” (Military Times, 4/16).

A nationwide health information technology (health IT) infrastructure can offer tremendous benefits to the American public, including the prevention of medical errors, improved efficiency and health care quality, reduced costs, and increased consumer engagement. However, if health IT is not designed, developed, implemented, maintained, or used properly, it can pose risks to patients.

Section 618 of the Food and Drug Administration Safety and Innovation Act (FDASIA), Public Law 112-144, requires that the Food and Drug Administration (FDA), in consultation with the Office of the National Coordinator for Health Information Technology (ONC) and the Federal Communications Commission (FCC) (collectively referred to for purposes of this report as “the Agencies”1), develop and post on their respective web sites “a report that contains a proposed strategy and recommendations on an appropriate, risk-based regulatory framework pertaining to health information technology, including mobile medical applications, that promotes innovation, protects patient safety, and avoids regulatory duplication.” This report fulfills the Section 618 requirement.

1.1 Introduction
The promise of improving health care through the ready access and integration of health data has drawn significant national attention and federal investment. David Blumenthal (former National Coordinator for Health Information Technology) and Marilyn Tavenner (current Administrator for the Centers for Medicare & Medicaid Services, CMS) have characterized the situation well:

“The widespread use of electronic health records in the United States is inevitable. EHRs will improve caregivers’ decisions and patients’ outcomes. Once patients experience the benefits of this technology, they will demand nothing less from their providers. Hundreds of thousands of physicians have already seen these benefits in their clinical practice.
But inevitability does not mean easy transition. We have years of professional agreement and bipartisan consensus regarding the potential value of EHRs. Yet we have not moved significantly to extend the availability of EHRs from a few large institutions to the smaller clinics and practices where most Americans receive their health care.” [1]

The two overarching goals of moving to the electronic exchange of health information are improved health care and lower health care costs. Whether either, or both, of these goals can be achieved remains to be seen, and the challenges are immense. Health care is one of the largest segments of the US economy, approaching 20% of GDP. Despite the obvious technological aspects of modern medicine, it is one of the last major segments of the economy to become widely accepting of digital information technology, for a variety of practical and cultural reasons. That said, the adoption of electronic records in medicine has been embraced, particularly by health care administrators in the private sector and by the leaders of agencies of the federal and state governments with responsibility for health care. Although the transition to electronic records now seems a foregone conclusion, it is beset by many challenges, and the form and speed of that transition is uncertain. Furthermore, there are questions about whether that transition will actually improve the quality of life, in either a medical or economic sense.

The accountable care organization model has produced mixed results to date. In ACO success stories, technologies such as analytics play a big role.

Engage Patients: 16 Creative Healthcare Strategies

(Click image for larger view and slideshow.)

While the number of Pioneer accountable care organizations (ACOs) shrank last fall, overall ACO enrollment is up — and participants are investing heavily in technologies that analyze, save, and streamline to help generate the model’s promised benefits.

The Pioneers were the showcase healthcare systems recruited by the Centers for Medicare and Medicaid Services (CMS) to prove the value of reorgnizing reimbursement for care around quality and efficiency — for example, with incentives for eliminating unnecessary tests or eliminating expensive treatments for diabetics through better preventative care. That was followed by the launch of the Medicare Shared Savings Program in which participants were allowed to keep a portion of the savings they achieved on behalf of Medicare. Some private insurers introduced their own ACOs even before the federal ACO initiatives were initiated under the Affordable Care Act, and the federal programs are spurring more private sector activity.

The ACO movement has also seen some setbacks. Medicare recruited 32 Pioneer ACOs in December 2011, but membership dropped to 23 last year as some participants found the program’s goals difficult to achieve. On the other hand, late last year 123 new organizations became Medicare Shared Savings Program ACOs, meaning they will be allowed to keep a portion of the savings they achieve. That was just the latest expansion — overall, there are now 366 Medicare ACOs. Healthcare providers also work together to forge commercial ACOs, bringing the total number of ACOs to 606, according to CMS. Within two years, there could be between 700 and 1,000 ACOs.

Because their business model demands both quality and cost efficiencies, ACOs recognize they must use technology wisely to improve patient care and efficiencies, said Laura Beerman, healthcare network manager at Decision Resources Group, in an interview. After CMS released first-year results for Pioneer ACOs in July 2013, industry executives scrutinized the information to try and determine how to make the model succeed — for patients, payers, and providers. Decision Resources found mixed results across ACOs in performance, savings, and patient benefits, Beerman said, but ACOs can learn from peers’ experiences.

(Source: Decision Resources Group; designer: Steve Benton)

One answer: Use technology to eliminate redundancies, inefficiencies, and errors.

“We’ve been able to gather some data on how ACOs plan to distribute any shared savings that are achieved. Any shared savings are going to be initially reinvested back into infrastructure, and I think it’s safe to assume [health] IT is a big part of that,” Beerman said.

That’s the case at Apollo Medical Holdings, operator of ApolloMed ACO. It announced Monday that it now has 30,000 Medicare beneficiaries and more than 700 member physicians. Executives credit technology and analytics (as well as a great staff) for its ability to reduce expenditures by $3.1 million during its first year as an ACO. As a result, the organization is expanding beyond Southern California into northern areas of the state, Mississippi, and Ohio, Dr. Warren Hosseinion, CEO of Apollo Medical Holdings, said in a statement.

As key tools for success, he cited the organization’s expertise in analytics and particularly population health management — analysis of risks and trends across the population of the ACO’s members to identify opportunities to intervene. The goal is “to more efficiently manage patient costs through improved care delivery with a focus on higher quality patient outcomes, more efficient utilization, and better care coordination among providers,” he wrote.

Integrating data across healthcare organizations is vital, agreed Jeff Smith, president of Mid-Atlantic initiative and strategic business development at ACO consulting firm Lumeris. “It’s critical, to be successful in this new model, to incorporate both clinical and financial information into the new platform the provider is going to use. If I only have clinical — where EHRs have historically provided information — or financial — there’s no complete picture,” he said in an interview. “You actually have to combine both, the clinical and the financial information, so a provider is able to do not only a better job treating patients across the whole continuum of care, [but] they also need the comparative cost information. [Having both] enables the physician and the patient to embrace that consumer-directed model that everyone’s been talking about.”

Download Healthcare IT In The Obamacare Era, the InformationWeek Healthcare digital issue on changes driven by regulation. Modern technology created the opportunity to restructure the healthcare industry around accountable care organizations, but ACOs also put new demands on IT.

Alison Diana has written about technology and business for more than 20 years. She was editor, contributors, at Internet Evolution; editor-in-chief of 21st Century IT; and managing editor, sections, at CRN. She has also written for eWeek, Baseline Magazine, Redmond Channel … View Full Bio

House lawmakers plan to hold back millions in dollars of technology funding from Defense and Veterans Affairs department planners until Congress is convinced they are making progress on developing a way to share electronic medical records.

At an April 9 hearing, members of the House Appropriations Committee approved a fiscal 2015 budget plan that would hold back 75 percent of VA’s requested record system upgrade funds, contingent on the two departments proving that they are close to a seamless medical record system for troops and veterans.

Rep. John Culberson, R-Texas, chair of the committee’s military construction and veterans affairs panel, said that similar language is planned for the defense appropriations and defense authorization bills set for May. Pentagon planners won’t get their full technology request until lawmakers are satisfied they’re addressing the shared records issue.

“If they want their money, they’re going to have to earn it,” he said.

Frustration with the military/veterans records systems has been rising on Capitol Hill since early 2013, when department leaders announced they would abandon plans for a single system that could track individuals from boot camp through their VA care. The price tag for that effort would have approached $30 billion.

But lawmakers noted that the departments had already spent more than $1 billion and several years on the joint system before changing plans, calling into question whether a seamless lifetime military medical record would ever be possible.

Defense and VA officials have repeatedly worked to assure Congress that the departments already are sharing significant amounts of medical information, including a common display format for basics like patient prescriptions, past physician visits and check-up information.

Pentagon officials have promised that having a separate records system from the VA won’t prevent them from sharing files seamlessly. Military medical officials are in the process of seeking proposals for a new multibillion-dollar records system, one that may include elements of the existing VA system.

Rep. Sam Farr, D-Calif., blamed most of the confusion surrounding the issue on the Pentagon’s “unwillingness” to adopt the established VA records system, but said he’s hopeful the withheld funding plan can force a change.

President Obama promised lifetime electronic medical records for service members back in 2009, as part of a host of promised reforms to veterans services. Rep. Sanford Bishop Jr., D-Ga., said that after years of frustration, he hopes the funding plans “have finally gotten the two departments’ attention, and I expect to see some real progress on this soon.”

The House budget proposal for VA would provide about $65 billion in discretionary funding in fiscal 2015, about $1.5 billion above this fiscal year but about $400 million less than what administration officials had requested.

That would include about $173 million in funding to continue work on the department’s Veterans Benefits Management System and $20 million more for digitizing veterans’ paper medical records.

Officials said those funds are needed to help VA stay on track with the plan to eliminate its disability benefits claims backlog in 2015.